Is it better to invest my money in Mutual Funds or in Stocks and shares? Which one of these two investments will be able to withstand the occasional crashes in stocks market?

Question

I am new to investing in Mutual funds or stocks. In the past, investing in savings account and GICs under the Tax Free Saving Account was all I knew. Sure, the amount of interest I get from savings and GICs accounts were minimum but I had the peace of mind that my money will still be there, when I needed them. I learned that with mutual funds and stocks, there is no guarantee of getting back the principal amount i invested. In fact, there is every possibility,  that i could go into losses.

Lately I have been feeling brave enough to try out new riskier investments such as mutual funds and stocks, shares in companies. I am a complete newbie when it comes to risky investments, which is why I want to choose between the less riskier type of investments. I don't have the stomach to go for aggressive investments.

One of my friends explained to me that due to yearly inflation, the amount of interest I earned from savings accounts and GICs is not worth much. Looking at the price of commodities and essential goods going upwards, after adjustments, the interest i earned from my savings account is in fact, negligible if we factor in the yearly price inflation.

I personally feel that riskier investment is the way to go for me, as there is the possibility of earning a lot more money in much shorter period of time. I just need to choose between the easier to understand type of investment,  for me it is either mutual funds or the companies stocks and shares. Will someone at least guide me to choose the right type of investment to grow my money faster?

Answer 1

Before we decide which is better to invest in between mutual funds and stocks, we need to know exactly what, each type of investment is. They both have their pros and cons, for some people mutual funds works great for them, and for others stocks is a better choice.

Let's find out the difference between mutual funds and stocks:

1. When you buy shares in a company, you are actually buying a share in the company's profit as well. This means you could either earn dividends from your shares of the company or you could go into losses when the company isn't doing well.

When you buy mutual funds, you are buying a portfolio of investment which could include ETFs, index funds, commodities, other investment funds.

2. The risk is much higher when you buy stocks individually because you need to do a lot of own research into the company's financial performance in the past, if you want to invest properly. This takes a lot of time and expertise to find the best stocks to buy in the market. Many people simply doesn't have the time or skills to pick the right shares of a company and they end up incurring big losses. Of course, the rewards is great also, if the company's shares rises quickly in value.

With mutual funds, the risk is much more spread out over many investments. So if one investment in particular sector isn't doing good, the other investment in other sector could sort of compensate for the losses. In a way, the risk is minimized due to many investments included in the mutual funds.

3. Stocks are usually managed by yourself and you do not have to pay someone to manage them for you, although there are people who do hire professional to manage their stocks for them. Investor usually pay for the transaction fees for buying or selling shares.

Mutual funds are usually managed by professional personnel and it can be an active or passive management. All the buying and selling of assets stocks, ETFs are managed by the appointed professional. Normally you pay fees to them for managing your mutual funds for you. It doesn't come out directly from your pocket but they to take their commission from the mutual funds that you bought from them.

4. With stocks, you can have the freedom and choice of choosing your desired shares in a company that you want to invest in. You can build your own favourite portfolios, buy or sell them with great flexibility.

With mutual funds, your choices are limited. You do not get to pick each individual stocks of a company. The investment portfolio are sort of already chosen by the professional managing the funds. These funds are invested in various sectors of the market and has a wide area of investment. However, you do have the choice of choosing the different types of mutual funds which are invested in different sectors of the market.

Conclusion:

If you are a savvy investor and have done your homework properly, then investing in stocks makes sense for you. Buying stocks allows you to create your own investment portfolio and avoid paying management fees to someone to manage your stocks assets.

But if you absolutely have no idea of stocks or the financial markets and you still want to invest in the market, then buying mutual funds makes sense. With mutual funds, there are professional who manages your funds for you. They do all the hard work of buying and selling in the market. You stand to collect profit or losses at the end of the day. Your risk is minimized because you have someone with required financial expertise to help navigate the rough waters of the market. They have the responsibility of managing your mutual funds properly, so they won't intentionally mess up your investments.

If you do not know what you are doing in the financial market, you could quickly lose all your money just like that. In this case, mutual funds is the best and only sensible investment to go for. Many people have had success with investing in a mutual funds.

When you do decide to take to the rough water and start investing in stocks, you must be like Warren Buffett. Buy good strong company shares and hold them for many years. You profit from long term investment instead of short term gains. You need to be very lucky to earn good profit from day trading or short term investment. Not many people have the good luck and they end up losing all their money with short term trading. Instead you must opt for long term investment in a company's stocks.